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Mathematical Methods of Operations Research

, Volume 75, Issue 1, pp 29–65 | Cite as

Integrating inventory control and a price change in the presence of reference price effects: a two-period model

  • Alfred TaudesEmail author
  • Christian Rudloff
Original Article

Abstract

Demand and procurement planning for consumer electronics products must cope with short life cycles, limited replenishment opportunities and a willingness to pay that is influenced by past prices and decreases over time. We therefore propose the use of an integrated pricing and inventory control model with a two-period linear demand model, in which demand also depends on the difference between a price-history-based reference price and the current price. For this model we prove that the optimal joint pricing/inventory policy for the replenishment opportunity after the first period is a base-stock list-price policy. That is, stock is either replenished up to a base-stock level and a list-price is charged, or it is not replenished and a discount is given that increases with the stock-level. Furthermore, we use real-world cell phone data to study the differences between an integrated policy and traditional sequential optimization, where prices are initially optimized based on the expected demand and ordering cost, and the resulting demand distribution is used to determine an optimal inventory policy. Finally, we discuss possible extensions of the model.

Keywords

Dynamic programming Inventory control Dynamic pricing Reference price 

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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Institute for Production ManagementVienna University for Economics and Business AdministrationViennaAustria
  2. 2.Austrian Institute of TechnologyViennaAustria

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